The Different Types of IRAs
Beyond Roth and Traditional, there are other choices.
What don’t you know? Many Americans are aware of Roth and Traditional IRAs, but there are also other types of IRAs that serve the self-employed and the self-directed investor. Here’s a quick look at several basic classes of IRAs, variations and additional information.
Traditional. Annual Contribution Limit = $4,000.00
Created in 1974 as part of the Employment Retirement Income Security Act, the traditional IRA is an individual savings plan. Contributions are tax-deductible (when requirements are met), with an annual limit. Although earnings grow tax-deferred until withdrawal, they are taxed when withdrawal begins – and this must happen by the time the owner reaches the age of 70. If the required amounts are not withdrawn at that age, a 50 percent penalty will be assessed on the amount not taken.
Roth. Annual Contribution Limit = $4,000.00
The Roth IRA began in 1998 as a result of the1997 Taxpayer Relief Act and gives individuals the ability to invest post-tax income (up to a specified amount) each year. Earnings grow tax-free, and withdrawals may be made free of penalty after the owner reaches the age of 59, as long as the funds have been in the account for a minimum of five years. While contributions are not tax-deductible, a Roth IRA has an advantage on the back end, with fewer requirements and limitations regarding withdrawals.
SIMPLE. Annual Contribution Limit = $10,500.00
A Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA) is a qualified retirement plan provided by employers with 100 employees or fewer. Unlike plans such as the 401(k) or 403(b), a SIMPLE-IRA has much simpler and more affordable administration rules. They have lower contribution limits than other IRAs but are funded by pre-tax salary reduction and require the employer to contribute a minimum amount.
SEP. Annual Contribution Limit = $45,000.00
The SEP-IRA (Simplified Employee Pension) plan tends to be even more simple than the SIMPLE-IRA. Contributions are tax-deductible, but qualified withdrawals taken after age 59 1/2 are subject to taxation at standard tax rates. If an employer implements a SEP plan, all employees must receive the same benefits. If you are self-employed with no employees, there are no administration costs.
Uni-K (Individual K) Annual Contribution Limit Varies
The Uni-K is a profit-sharing plan with no annual contribution requirements for owner-only small businesses. It is cost-effective and can offer some major advantages such as increased contribution limits. Contributions are tax-deductible to the business, and employee contributions are made pre-tax. Distributions may be taxable, and there is usually a 10 percent penalty applied to withdrawals by participants under the age of 59 1/2.
Roth 401(k). Annual Contribution Limit = $15,500.00
First introduced to investors in 2006, the Roth 401(k) has the same contribution limits as a regular 401(k) plan. It is a 401(k) account that, in terms of taxes, is treated like a Roth IRA. The major difference is that 401(k) contributions are made pre-tax, whereas the Roth 401(k) is funded with after-tax dollars. Which is better depends on your situation and whether you’d like to be taxed up front or later on.
Regarding Roths... it is worth noting that the laws permitting Roth IRAs and Roth 401(k)s will be up for renewal in 2010. There’s always the chance that Congress could decide not to extend the laws, in which case you could no longer contribute to these accounts. That means you will be forced to make new contributions to the traditional versions of these accounts after 2010. It does not mean that you will be taxed on or lose money from the accounts.
The bottom line: You should consult a qualified financial advisor regarding your IRA options. No one IRA is right for everyone, so do your homework and seek advice from a qualified professional if you are unsure of how to proceed. For more information or to set up an appointment call (863) 683-2736 for Polk County or (863) 385-5172 in Highlands County.
These views should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. To learn how a Financial Advisor from Heacock Financial Group can help you plan for a comfortable retirement, call today in Highlands County 863-385-5172, Polk County 863-683-2736 or Toll-Free 888-520-7526. Heacock Financial Group is an independent Registered Investment Advisory Firm with Securities and Investment Advisory Services offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Securities are: Not NCUA Insured; not guaranteed by the Financial Institution; subject to risk and may lose value.
